Refinance to access equity

What is home equity? 

Let’s start with the basics. Home equity is how much your home is worth minus your mortgage. Essentially, it’s the part of the home you actually own. 

Your home equity will usually go up the longer you pay off your home loan. Of course, other things can also come into play! For example, when the real estate market goes up or down, this can affect how much your house is worth—which also affects your equity. 
 

What is refinancing? 

Refinancing involves taking out a new Home Loan to pay off your old one.  

It’s pretty common for people paying off their mortgage to seek out a new home loan with lower interest rates or a different loan term, but it can also be used to unlock your home equity. 

This usually involves taking out a new home loan that’s bigger than your current mortgage. The difference is then paid to you in cash, which is why this type of refinancing is called cash out refinancing. 

Can I refinance my home loan to access equity? 

You sure can—as the following example should demonstrate! 

So, let’s say Anika and Toni have a mortgage of $600,000 and they’ve already paid off $400,000. They also want to access some of that money for a second property, so they decide to refinance their home loan. 

After crunching the numbers and working out what kind of repayments they can afford, they decide to go with a new home loan worth $800,000. As a result? They’ve now unlocked $200,000 in spending money to put towards an investment property. 

What can I use my home equity for? 

This really depends on the lender who signs off on your new loan. In most cases, they’ll want to make sure that you’re using the equity responsibly.  

That doesn’t necessarily mean they’ll decline your application if you want to put your equity towards a holiday. But they’ll want to make sure you’re still in good financial shape, even after refinancing. Other things you can use the equity for might also include: 

• Buying a new property: You could use your home equity to purchase an investment property. This can supplement your income if you rent it out to someone and you can always sell it later for a (potential) profit.
• Other investments: Putting some of your unlocked equity into a managed fund or commodities is also a pretty typical way to invest. Just be aware that—like real estate—there’s a risk of loss as well as gains.
• Home renovations: If you’re looking to boost the value of your property, home improvements and renovations might be able to help. Unlocking your equity can also go a long way when it comes to covering the costs.
• Buying a new car: Your home equity can also cover big purchases like a shiny, new car. However, you’ll want to think about whether that Ford Mustang is really worth all those extra repayments on your home loan.
• Paying off debt: If you have some credit cards, personal loans or HECS debt you need to pay off, your home equity might come in handy. Just beware of taking on an even higher rate of debt in the process. 

It’s worth thinking very carefully before you use your equity to make a purchase. Refinancing to unlock equity often means taking on more debt. Folks who are in a good financial place might be able to handle that, but if you’re already struggling with your current repayments, you’ll want to give it a second thought. 

What are the pros and cons of refinancing to access equity? 

Pros	Cons
Financial flexibility	Increased debt
Your home equity—if used responsibly—might give you more control over your finances. It could help you start a business, buy a second property or even set up an emergency fund. Basically, you might end up with more breathing room to save, invest and spend.	There’s really no way around this one. By increasing your home loan, you’ll be taking on more debt. As a result, you might have to extend your loan term or make increased repayments on your mortgage.
New loan conditions	Extra fees
If you do your research, then refinancing might also help you secure a loan that works better for you. This could be a loan with lower interest rates, more flexibility or options that suit your current situation.	To begin, the fees to set up a new loan and conduct a valuation of your property might end up costing you over $1,000. What’s more, increasing your home loan can invite additional stamp duty costs, which can add hundreds or thousands more to your fees.
Lower interest options	Risk of foreclosure
The interest rates on home loans aren’t exactly negligible. However, generally speaking, they’re still lower than what you’d get on a personal loan or a credit card. This makes refinancing to access equity an attractive option for people who need some extra money.	Unlocking and using your equity removes a financial safety net. And, if you suddenly lose your job or interest rates spike, it might be much harder to cope with the mortgage repayments.

Can I use home equity to get a better home loan? 

Having more home equity definitely won’t hurt your chances of getting a better loan term. It often means that you have a lower LVR or ‘loan-to-value ratio’—to which lenders pay close attention. 

In situations where you can actually negotiate your rate, more home equity will make you a more attractive prospect. It makes loaning money to you less of a risk because you have more security. That being said, you’ll want to start by asking the lender whether or not they’re willing to negotiate on rates. It’s basically their call! 

Helpful tip:

You’ll also want to pay attention to ‘principal’ on your new loan—the amount that you’ve already paid off. If it’s less than 20% of the loan amount, you’ll probably incur a hefty fee called Lender’s Mortgage Insurance.

Debbie Shankar

Former Group Content Manager, Lendi

Where can I find and compare Home Loans? 

Whether you’re looking to refinance or buying your first house, iSelect and Lendi can help you compare Home Loans from a wide range of providers! 

With us, you can weigh up different loan terms, options and interest rates at a glance. Just punch in a few details to compare home loans and we’ll do the rest. Pretty nifty, if we do say so ourselves!